@theMarket: Oil Prices Boost Inflation But Don't Deter Investors
Stocks did remarkably well this week considering the macroeconomic data. That could be signaling further upside soon for the financial markets.
The decline in the inflation rate over the past six months has been encouraging. However, the recent climb in oil and gasoline prices threatens to put a crimp in the trend of declining inflation.
As I have written many times before, oil is the fuel that powers the global economy. It is involved in every stage of production and as such, its price has an enormous influence on the rate of inflation. Thanks to production cuts by OPEC-plus over the last few months, the price of oil has risen from roughly $65 a barrel to over $90 a barrel.
It was inevitable that this recent strength in oil would begin to show up in the macroeconomic data. It did. This week, the Consumer Price Index (CPI) and the Producer Price Index (PPI) for last month came in higher than expected. The culprit in both cases was the higher price of oil.
Producer prices in the U.S. increased by 0.7 percent in August, which was the highest level since June of last year. Within the index, energy prices increased by 10.5 percent. The CPI also increased by 0.4 percent on the back of higher gasoline prices.
While that was bad news for inflation, the economic picture got a boost as retail sales jumped 0.6 percent. That was much higher than the estimate for a 0.2 percent gain. But much of that increase was due to higher gasoline prices. If you exclude auto and gas, sales increased by only 0.2 percent.
Jobless claims also came in lower than expected indicating that jobs are still plentiful in the overall economy.
From a global perspective, the U.S. remains the place to put your money and the U.S. dollar reflects that sentiment as the greenback continues to gather strength.
Next week (on Sept. 19-20), is the next Federal Open Market Committee meeting (FOMC), The markets are betting that the Fed will hold off on another interest rate hike. Despite the stronger August inflation data, the feeling is that the Fed will hold off and wait to see more data before deciding on a rate rise possibly in November.
The risk for stocks next week is if the FOMC decides to raise rates again. That would throw the markets a real curve ball and likely send markets back on their heels. I give that a low probability given that the Fed would have already marched out several officials to disabuse investors' expectations of a pause.
As I have been writing, I expect a bounce shortly. It could take the S&P 500 Index up 1-2 percent or so. I am looking for the high end of this range, given that a pause by the Fed should be received favorably by world markets. It could also bring some relief to overseas markets that have been suffering under the weight of the strong dollar.